CHINA’S Communist leadership is taking a new class in economic management. The new subject is how to cope with a downturn. And the lessons might be coming hard to the world’s second largest and most vibrant economy which has become used to decades of vertiginous growth.
Though China’s stock market is notoriously unruly, its 28 percent fall over last year, which accelerated in December, is a reflection of business anxiety over the Sino-US trade confrontation that President Donald Trump has brought about. While apparently encouraging Beijing talks between American and Chinese officials have been taking place in recent days, it seems unlikely President Xi Jinping is not about to fold in the face of Trump’s demands which include a level trading playing field and the proper protection of intellectual property rights by Chinese courts. Ultimately there will be compromises but these will have to be negotiated in a form by which China and Xi himself do not lose face.
Nevertheless, from the start of this ugly trade dispute, it seemed clear that China was going to suffer more than the US, even though exporters, such as American grain farmers, are complaining that they have already lost an extraordinary $12 billion in sales to China.
The class the Beijing leadership is currently sitting involves stimulating domestic demand in order to soak up the excess capacity of the country’s trammeled exporting giants. To a degree, the general rise in prosperity in the last 20 years, not least among the emerging middle class has already generated significant local demand.
Foreign economic wiseacres have for years been predicting the Chinese economy would implode under a crushing weight of debt. Yet one of the great achievements of the government has been to use its control of the financial levers to bail out over-lent financial institutions and force restructuring of ailing corporations. Nevertheless, central regulators have struggled to control the activities on nonbank lenders and curb the spending of powerful regional cities, such as Shanghai, hell-bent on pushing for ever greater growth and prestige.
Now, in the face an export crisis brought about by Trump’s trade attack, Beijing itself has stepped up its infrastructure investment to sustain a construction industry that is beginning to struggle. In the last month, the government has approved $125 billion in new investment for China Railway Corp, which means 6,800 kilometers of new rail lines, 3,200 kilometers of which will be high-speed rail — the country already has a greater length of HSR lines than the rest of the world put together. However, though some of the funding will come from local governments, China Railways already has an eye-watering debt mountain of some $732 billion. Annual interest on this debt is already around $2.5 billion while its operating profit is $2 billion. Rail travel in China is cheap. But given these figures, it may not remain so.
This new investment is a clear turnaround in Beijing’s thinking because early last year the government blocked a series of planned rail investments. But the change does not give the impression of panic. Xi’s administration still looks to be in command of this massive beast of an economy. Sensational growth has been managed well for 41 years thanks to central control. Who is to say that those same levers cannot now guide China through a downturn?
